I’m Jake Chervinsky, General Counsel of Compound Labs and one of the proposed committee members for this organization. I strongly support the proposal and I’d like to explain why in as much detail as possible here, as well as address some of the community’s concerns. I’ll start with a summary of my main points and then expand on each; if you have any questions or want me to dig deeper on anything, please ask.
The success of DeFi in general, and Uniswap in particular, depends on how effectively we engage with regulators and policymakers over the next 6 to 18 months. If we fail to act quickly and forcefully, the consequences could be severe.
The proposed committee is well-qualified to manage this program, both in terms of skill and experience with DeFi policy and government affairs, and in terms of commitment to the principles of decentralized governance.
Funding for engagement with regulators and policymakers should come from DeFi protocol treasuries at the discretion of decentralized governance. Uniswap can take lead, but other protocols should join as well.
The proposed funding amount is appropriate given the scope and urgency of the task, especially considering how much money TradFi spends on government affairs, and the fact that centralized crypto companies have no incentive to lobby for DeFi.
Programs like this should always operate at the pleasure of decentralized governance, and those involved should always be accountable to the community. This means we, the committee members, must (and will) prioritize transparency.
I’m a lawyer based in Washington, D.C. with a background in regulatory compliance and government enforcement defense. I started my career with a multinational firm handling anti-money laundering and anti-corruption matters for Fortune 500 clients. After a federal judicial clerkship, I joined a boutique firm specializing in cross-border dispute resolution and white collar criminal defense. I fell down the crypto rabbit hole in 2017 and represented a number of clients in crypto-related matters involving the SEC, CFTC, and DOJ before joining the industry full-time.
I joined Compound as General Counsel in May 2019 after realizing how DeFi can reshape the global financial system for the better. Since then, I’ve focused all my energy on the legal, regulatory, and policy issues surrounding DeFi. I serve as Chair of the Blockchain Association’s DeFi Working Group and as a Strategic Advisor to Variant Fund. I’m a member of the Uniswap community and I’m personally, deeply committed to the success of DeFi as a whole. Achieving the mission of this program is exactly why I’m here in the first place.
DeFi Regulatory and Political Landscape
In my view, regulatory risk is the single greatest threat to DeFi today. Before this year, DeFi received fairly little attention from the government due to its small size; the industry’s perception was that DeFi was “flying under the radar.” But with success comes scrutiny. After the rise of yield farming, the DeFi bull market, and Uniswap’s appearance in mainstream media, those quiet days are over. Regulators and policymakers worldwide are now watching closely. Although some of them understand the benefits that DeFi offers, many others are skeptical about a decentralized financial system that lacks the intermediaries they regulate.
Initial reactions from some regulators have been discouraging. In the AML/CFT arena, policy changes are now being considered that could significantly harm DeFi. For example, the FATF’s March 2021 draft guidance suggested that governance token holders could qualify as regulated VASPs, or that crypto exchanges could be prohibited from allowing withdrawals to non-custodial wallets. Policymakers are also concerned about the risks posed by stablecoins — a critical piece of the DeFi ecosystem — to monetary sovereignty and financial stability. As time goes on, we can expect to hear more questions and concerns about numerous other subjects as well, including the US federal securities, commodities, and tax laws, to name a few.
It’s crucial that we take the concerns of regulators and policymakers seriously. Like it or not, they have an unparalleled ability to hamstring the growth of DeFi, and if we fail to engage, the most likely outcome is a draconian “regulate first, ask questions later” approach which could set DeFi back by years, if not permanently. Luckily, we still have time. Most regulators and policymakers haven’t made up their minds yet, and in the US, some high-ranking positions are still waiting to be filled. But we can’t wait; now is our best chance to have a meaningful impact on DeFi policy before these decisions are made for us without our input. Time is of the essence.
Proposed Committee and Program Strategy
My fellow proposed committee members are among the smartest, most experienced, and most effective advocates for good DeFi policy in the world. I’ve had the pleasure of working personally with nearly all of them and I have no doubt that they’re the right people to lead this effort. From the feedback I’ve seen, the community seems to agree, so I’ll leave this here.
But what exactly will we do with the funds? Although the decision won’t be up to me alone, and my fellow committee members may have other (better) ideas, here’s generally how I think about our strategy and use of funds:
Education. The vast majority of regulators and policymakers don’t yet understand the technical and practical details that distinguish DeFi from TradFi. Without that knowledge, their initial reaction may be to impose the same regulatory obligations on DeFi protocols as they do on centralized financial institutions. In other words, they may mistakenly assume that Uniswap is an “exchange” like any other, implicating all the same risks and requiring all the same regulatory safeguards as Coinbase, et al. That’s wrong. To avoid such an outcome, we need to educate regulators and policymakers on how DeFi works and why its unique properties negate the need for many traditional regulations.
Advocacy. We can’t just educate government officials about the greatness of DeFi and then hope they leave us alone. Instead, we need to advocate strongly in favor of policies that support adoption of DeFi protocols and against policies that restrict access to DeFi or create a regulatory moat around entrenched incumbents. Good advocacy is both reactive and proactive; we need to address regulatory developments as they arise and advance our own policy proposals. Good advocacy is also both government-facing and public-facing; we need to engage with regulators and policymakers while also building consensus within the industry and grassroots support from the community.
Defense. We need to be prepared to take swift action in case of hostile guidance, rulemaking, legislation, executive orders, enforcement actions, or otherwise. It’s hard to predict in advance what form our defensive efforts might take, and hopefully the need won’t materialize at all. Yet, there’s plenty we can and should do now to prepare for the worst. For example, we could commission legal research on defense theories or constitutional protections that may apply to DeFi. Equally important, it’s a huge benefit to have resources set aside and available to allocate quickly in an emergency.
I anticipate the bulk of this work will involve retaining specialists such as researchers, lawyers, lobbyists, organizers, designers, and consultants, as well as making contributions to other aligned organizations and hiring full-time staff for the 501(c)(4). I understand that hiring lawyers and lobbyists may seem distasteful — in a sense, it goes against the ethos of DeFi, which emphasizes opting out of the legacy power structures that brought us to this point in the first place — but as @Marvin put it, this is “what it takes to win.” I prefer to win.
Funding from Uniswap and Other Protocols
Given the importance of engaging on DeFi policy, I believe this program is a valuable use of Uniswap’s resources and a paramount example of how DeFi communities can achieve off-chain goals without sacrificing the decentralization at their core. Uniswap is especially well-positioned to lead this initiative. The issues and strategy that I outlined above are particularly important for Uniswap as a decentralized exchange protocol that allows users to trade an enormous range of Ethereum-based assets, an activity that’s heavily regulated in the traditional centralized context. Uniswap also has the capacity to fund the program thanks to its substantial treasury.
That said, I appreciate the feedback from some community members that Uniswap shouldn’t be asked to fund the entire program on its own, or all in one shot (more on that below). There’s no question that, to be effective, we will need to engage with regulators and policymakers on behalf of the entire DeFi sector, not just Uniswap. For that reason, although I do believe Uniswap is the right “founding protocol” for this program, my hope is that other DeFi communities will see fit to join the effort and allocate additional funds from their treasuries to the 501(c)(4).
Initial and Total Funding Amounts
As far as I can tell, the point of greatest contention within the community is how much funding the program should receive. In my opinion, the size of the request in this Consensus Check is ultimately appropriate given the magnitude of the task at hand. As @sukernik explained, we aren’t proposing to form a startup that can wait to launch a minimum viable product before seeking additional funding. We’re proposing to form a nonprofit that can meaningfully impact policy on the global stage within the next 6 months.
This mission is an expensive one. There are thousands (literally, thousands) of regulators and policymakers worth engaging around the world today. There’s virtually no amount of money that we couldn’t put to good use immediately. Other industries that have above-average success with government affairs — including TradFi itself — spend hundreds of millions of dollars each year to influence policy in the United States alone. Make no mistake, we are the underdogs. In my view, if protocol treasuries can help us level the playing field, we’re obligated to use them.
It’s particularly important for protocol treasuries to fund DeFi-specific policy efforts because nobody else will. As of now, centralized crypto companies have a tense relationship with DeFi. While they appreciate the role that DeFi tokens played in catalyzing the bull market, they also see DeFi protocols as competitors. These companies aren’t incentivized to, and indeed do not, dedicate resources toward DeFi policy. Coin Center and the Blockchain Association are both fantastic organizations, but neither focuses exclusively on DeFi as the 501(c)(4) would. If this is to be the only DeFi-specific policy organization in the world, we should fund it properly.
However, I also appreciate that 1M UNI is a significant sum, even if only a small fraction of the total treasury, and that some community members aren’t convinced that the full amount should be allocated in a single vote. With that in mind, I wouldn’t object to a smaller initial grant to get the program up and running, with the expectation that we will request additional funds from Uniswap and other protocols when appropriate. Although it may be difficult to measure our progress objectively over short time periods, I trust that the community can understand and evaluate our work in light of that caveat.
Transparency and Accountability
Transparency and accountability are essential to the success of this program and others like it. For many reasons, decentralized governance simply doesn’t work if the governors don’t have equal access to information about the protocol, including how its funds are being used. My goal as a proposed committee member is to provide as much public transparency as possible, to hold myself accountable to the community in the performance of my role, and to hold my fellow committee members to the same high standards.
@Marvin has already outlined the steps we’ll take regarding community updates, budgeting, and more. Personally, I’ll endeavor to make myself available to answer questions and attend community calls as much as possible.
We’re at a challenging time in DeFi’s history. Since last summer, we’ve proved the concept that financial activities more complex than transferring and storing value can be decentralized. As a reward, we’re now a subject of attention for regulators and policymakers worldwide. I strongly support this proposal because I believe it will help us advance good DeFi policy, a goal that is essential to Uniswap’s long-term success and well worth the cost.